Wage-and-hour Class Action


Ninth Circuit Upholds Finding That Franchisor Is Not A Joint Employer In Wage-and-hour Class Action, Affirming Summary Judgment

By Filemon “Phil” Carrillo on October 07, 2019

With the recent signing of Assembly Bill 5 (or AB-5) into law, the fate of franchising as a business model in California is uncertain. Under this new law a franchisee may become an employee of its franchisor, which places the very business model at risk. While the real-world implications of this remain to be seen, Franchisors can find some solace in the recent opinion issued by the Ninth Circuit in Salazar et al. v. McDonald’s Corp., et al., __ F.3d __, No. 17-15673, 2019 WL 4782760 (9th Cir. Oct. 1, 2019).

In Salazar, employees of McDonald’s franchisee Haynes Family Limited Partnership (“Haynes”) filed a class action suit against Haynes and McDonald’s U.S.A., LLC and McDonald’s Corp. (the McDonald’s defendants are collectively referred to as “McDonald’s”) on behalf of about 1,400 employees of Haynes. The suit was predicated on purported violations of California wage-and-hour statutes for denied overtime premiums, meal and rest breaks, and other benefits. In addition to the statutory violations, the plaintiffs asserted claims for negligence and civil penalties under California’s Private Attorneys General Act (“PAGA”). The plaintiffs alleged that McDonald’s and Haynes were their joint employers.

The evidence in the case showed that Haynes hired, trained, paid, managed the schedules of, disciplined, and fired its employees. There was no evidence that McDonald’s performed any of these functions.

McDonald’s, however, did provide franchisees like Haynes with, and at times required the use of, certain software and systems at the restaurants. These systems were used by Haynes for scheduling, timekeeping, and determining regular and overtime pay, which was central to the wage-and-hour allegations. The Ninth Circuit noted that this evidence “would permit a finding that McDonald’s could have prevented some of the alleged wage-and-hour violations but did not do so.” Salazar, 2019 WL 4782760, *2.

On McDonald’s motion, the trial court entered summary judgment in its favor, ruling that it was not a joint employer, and rejected the negligence claim. It later granted a second summary judgment motion holding that ostensible-agency liability was precluded by California Wage Order No. 5-2001’s (the “Wage Order”) definition of employer. Plaintiffs timely appealed.

The Ninth Circuit first analyzed whether McDonald’s was an “employer” under the Wage Order. Citing the California Supreme Court’s decision in Martinez v. Combs, 49 Cal.4th 35 (2010), it noted that there are three alternative definitions of an employer under the Wage Order: (i) the exercise of control over the wages, hours or working conditions, (ii) to suffer or permit to work, or (iii) the creation of a common law relationship. Each is addressed below in turn.

Control. In finding that McDonald’s did not exercise control over Haynes’ employees, the appellate court noted that the control the franchisor asserts is aimed toward quality control and that it does not retain a right to control the day-to-day aspects of the work. Notably, the court stated that McDonald’s involvement is “central to modern franchising and to the company’s ability to maintain brand standards,” but is not control over wages, hours, or working conditions. Salazar, 2019 WL 4782760, *4.

Suffer or Permit. The plaintiffs argued that because McDonald’s had the ability to prevent wage-and-hour violations caused by its software, the franchisor was their employer. In rejecting this position, the court drew a sharp distinction between responsibility for the alleged violations and responsibility for the fact of employment itself. In other words, the fact that McDonald’s had the power to prevent the statutory violations did not mean that it was an employer under the Wage Order. The court’s analysis centered on whether the franchisor had the knowledge of the work and still failed to prevent it from occurring. Because McDonald’s lacked the power to fire or hire, it was not the plaintiffs’ employer under the “suffer or permit” test.

Common law. The common law test in California of an employment relationship asks whether the putative employer controlled the manner and means of accomplishing the desired result. The Ninth Circuit cited the holding in Patterson v. Domino’s Pizza, LLC, 60 Cal.4th 474, (2014), that this test “cannot stand for the proposition that a comprehensive [franchise] system alone constitutes the ‘control’ needed to support vicarious liability.” Ultimately, the appellate court held that there was no evidence that McDonald’s had the requisite level of control over the manner and means of accomplishing the desired result, and thus it was not a joint employer.

After disposing of the plaintiffs’ theory of liability under the Wage Order, the Ninth Circuit held that McDonald’s could not be liable for statutory violations under an ostensible-agency theory, in which a party is deemed to be an agent because there is an impression of employment or agency. This holding was based on the fact that the Wage Order specifically defines “agent” as one that “exercises control over the wages, hours, or working conditions of any person.” Ostensible-agency falls outside of this definition. In light of the specific statutory definition, the ostensible-agency theory could not apply to hold McDonald’s liable.

The appellate court then analyzed whether McDonald’s could be held liable for the wage-and-hour violations under common law negligence. The court explained that where a statute creates a right that did not before exist at common law, the statutory remedy is exclusive. Finding that the Labor Code created rights that did not exist at common law, the plaintiffs could not pursue a negligence claim that depended upon establishing a violation of the statute. Moreover, the court held that because McDonald’s had no supervisory duties over Haynes, the plaintiffs could not satisfy the “duty” element of the claim.

Finally, the Ninth Circuit summarily disposed of the arguments on the PAGA claim having found that McDonald’s was not a joint employer, citing to a statute requiring an employment relationship to recover PAGA penalties.

In passing, the Ninth Circuit addressed the holding in Dynamex Operations West, Inc. v. Superior Court, 4 Cal.5th 903 (2018), which has recently been codified in AB-5. It held that because no one argued that the plaintiffs are independent contractors, the Dynamex test was not implicated in the case.

This begs the question: Can AB-5 be implicated in this context? Imagine a group of plaintiffs assert a wage-and-hour class action against a franchisee now, and also list the franchisor as a defendant alleging that the franchisor is their true employer. If the plaintiffs argue that under AB-5, the franchisee is the employee of the franchisor, would there be an argument that the plaintiffs are employees of the franchisor as a matter of law? In other words, if a franchisor is an employer of the franchisee, how could it be that the franchisee’s employees are not also necessarily the franchisor’s employees?

Perhaps employees of franchisees may pursue a franchisor for employment related claims using AB-5 and the joint employer test as alternatives. Namely, if AB-5 results in an employment relationship between the franchisee and franchisor, then the franchisees’ employees do not need to turn to the joint employer question. But, whether a court would interpret AB-5 in a way that has such broad implications remains to be seen.

This case report was prepared by Filemon Carrillo (fcarrillo@mulcahyllp.com) of the Irvine law firm of Mulcahy LLP. Mulcahy LLP is a boutique litigation firm that provides legal services to franchisors, manufacturers and other companies in the areas of franchise, trademark trade secret, unfair competition, and distribution laws.

Disclaimer: While every effort has been made to ensure the accuracy of this article, it is not intended to provide legal advice as individual situations will differ and should be discussed with an attorney experienced alcohol and distribution law. For specific technical or legal advice on the information provided and related topics, please contact the author.

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